ACK when the idea of e-health seemed fresh and
inevitably lucrative, three companies were often
described as the sector's sure winners: Medscape, Healtheon and WebMD. In a new and already
crowded field, the three promised to go beyond the
popular patient information sites and change the nature
of medical communication, restructure the nation's
health care systems and, oh yes, save lives.

Investors in 1999 reacted with Pavlovian shouts of
"buy" for these and many other health-related dot-com
stock offerings. But doctors and consumers yawned, and
Wall Street quickly pulled the rug out, just as it had done
with so many other Internet companies. So the question
is: What will they do now?

Become different companies, analysts said.

And indeed, they have -- and in similar ways. Healtheon and WebMD not only merged, under the name of
WebMD, but they also spent billions to acquire non-dot-com companies to secure a steady revenue stream and
establish a stronger foothold in the medical community.
Medscape, meanwhile, merged with MedicaLogic, a
software company, for the same reasons.

While these moves do not necessarily signal that
WebMD and Medscape have given up their grand ambitions, they do reflect the sober reality that investors will
not subsidize grand dot-com visions without seeing some
real revenue. In this case, that means injecting a Web
company with executives and the business methods of a
non-dot-com and building the company from a traditional model outward.

In that respect, the story echoes similar tales from the
retail world, where bricks-and-mortar merchants with
Web components are in most cases dominating their
"pure play" competitors. WebMD and Medscape have
mirrored that situation by buying or merging with
established companies that wanted to capitalize on the
Internet. And if that is the price of doing business in this
era of investor skepticism, executives and analysts said,
so be it.

Which is not to say that their stock prices have
flourished even during their metamorphoses. The stock
of WebMD, which merged with Healtheon late last year,
has dropped from a high of about $105 last year to the
mid-teens earlier this month. Medscape never reached
such heights, but its stock has also dropped sharply.

Analysts said the sell-off was due in part to the
tremendous momentum trading last year and early this
year, during which the market values of Internet companies with minuscule revenue rivaled those of multinational banks. More rational valuations were inevitable,
they said, but analysts stressed that the task of revolutionizing health care had been harder than anyone
initially thought.

Nonetheless, analysts said, there are indications that
they can deliver at least part of their promises. "If
anyone's going to be left standing, it's these two companies," said Thaddeus Grimes-Gruczka, a vice president
of Cyber Dialogue, a consulting firm. "It's just a matter
of time."

WebMD is the product of the merger between Healtheon and WebMD. Healtheon was started by Jim Clark,
the founder of Netscape, while WebMD was founded by
Jeffrey T. Arnold, a former medical equipment executive. The two men had hoped to connect the various
parts of the health care system -- hospitals, doctors,
patients and managed care companies and insurers --
through one site. To attract patients, WebMD's site
brimmed with medical information.

Medscape's ambition was to build an information site
focused on medical professionals. Because medical professionals have tremendous purchasing power, particularly with pharmaceutical companies, Medscape would
be able to charge high advertising fees, provided it could
get enough users to come to it and its companion site,
CBSHealthwatch.com.

While Medscape attracted millions of users and was
recognized for its content, the advertising and sponsorship dollars were not enough to cover the tens of millions
in costs.

As cracks were appearing in Medscape's plan, so, too,
were fault lines spreading through the plans of WebMD
and Healtheon. Both companies realized that doctors
were unwilling to invest time, money and effort in
Internet-based office systems, and without the doctors,
WebMD and Healtheon had little chance of success.

The two merged last November, betting that one
business could solve the e-health-care problem more
effectively, and began a buying spree. WebMD bought
Medical Manager and its subsidiary, CareInsite, for
$2.3 billion. Medical Manager helps doctors manage
patient schedules while connecting doctors' offices, insurance companies and health maintenance organizations through a proprietary network.

The company also spent $2 billion in its stock to buy
Envoy, a clearinghouse for transactions between doctors and insurance companies. With these and other
acquisitions, analysts said, the company established
enough leverage within the medical and insurance industries to make a meaningful push into the market.

Medscape was also evolving -- and, like WebMD, the
company was using mergers and acquisitions. The most
important of these was its merger with MedicaLogic,
which took place earlier this year.

Like Medical Manager, MedicaLogic, which began in
the early 90's, sold software to doctors. Unlike the
physician management services, MedicaLogic was
more focused on doctors than on office operations,
selling software that helped create digital records of
patients.

With MedicaLogic as its cornerstone, Medscape's new
corporate mission was sealed: the plan was to connect
every doctor to the Web, preferably with a hand-held
device, and give them a way to create digital medical
records.

As with WebMD, Medscape's consumer Web site
provides a vehicle for reaching doctors and selling them
software, and it remains an important source of advertising and sponsorship revenue. And, as with WebMD,
Medscape has become more of a business-to-business
company than a consumer site. Analysts said the improved versions of the companies were perhaps closer
to the mark than their earlier versions, but they still
face hurdles.

"They're both depending on a radical shift of automating and wiring the doctor's office," said Claudine
Singer, an analyst with Jupiter Research. "When you
talk about it in theory, it makes complete sense, but
health care is not a reasonable industry. Some might
call this a Herculean task. Some might call it Sisyphean."

Executives of the companies think that theirs is not a
futile effort, but they are quick to point out the obstacles.

"This industry has the lowest spending on I.T. of any
major industry," said Mark Leavitt, a doctor who is the
chairman of Medscape.

On average, he said, health care
companies spend 3.9 percent of their revenue on information technology systems. For financial services companies, by contrast, the figure is more than 10 percent.

As a result, he said, "you can't hope to create an
efficient market by just applying the Internet to it. You
have to pick a piece where you can get leverage, then
stick to it for years and years."

Among other things, Medscape's software, which Dr.
Leavitt developed for MedicaLogic, lets doctors type
their notes into a computer or hand-held device and then
creates a digital record and a database. Because the
software is Web based, doctors can gain access to those
records from wherever they have Internet access. The
software subscription fees range from $100 to $300 a
month. Medscape has enrolled 19,000 doctors, a small
number considering there more than 400,000 doctors
practicing in the United States.

But Dr. Leavitt said that with the growth of handheld
computing devices, doctors will be much more inclined
to use the service. "We're going to run as hard as we can
with Palms and laptops," he said, "but the appearance
of new Web devices are going to give a kick to this."

Kevin Berg, a research analyst with the First Albany
Corporation, an investment firm, said he expected
Medscape to make a profit in the second quarter of 2002
-- which was the same time he forecast profitability for
WebMD, which in late September laid off 1,100 employees -- 20 percent of its work force. WebMD's stock
continued to languish after Mr. Arnold resigned as co-chief executive earlier this month. (Mr. Clark resigned
from the board the same day.)

The linchpin of WebMD's business is its relationship
with physician management services like Medical Manager. In addition to owning Medical Manager, WebMD
has agreements with several other physician management service companies to market WebMD. But before
it can do that successfully, analysts said, WebMD must
integrate its Internet system with those of the physician
management companies.

That is because rather than distributing information
over the Web, these services use proprietary networks
that link each party directly to the others. WebMD hopes
to route these communications through its Web site,
giving access to all parties involved in a medical transaction. That way, a doctor who has finished a patient
appointment could, through one site, send a prescription
request to a pharmacy, submit a claim to the insurance
company, order laboratory tests and send an e-mail
message to the patient.

WebMD has said it is moving to knit together its
management services and will be rolling out the service
soon through its Medical Manager clients. But such
projections have done little to win the hearts of investors.

On the day the company announced that Martin J.
Wygod, Medical Manager's chairman and WebMD's co-chief executive, would become WebMD's sole chief
executive, the company also held a conference call with
investment analysts. Among other things, analysts questioned WebMD executives about the company's 2001
revenue. Within 24 hours, several analysts had downgraded WebMD's stock.

"Arnold's move wasn't at all unexpected," said Mr.
Berg of First Albany. "Marty Wygod's got his team in
place now, and it's very respected. The reason for the
downgrades was that people were expecting more positive news about 2001."

In particular, Mr. Berg said, analysts were hoping for
projections of revenue growth for 2001 in the range of 20
percent, and instead heard numbers closer to 6 percent.

Mr. Wygod, meanwhile, defended the company by
saying that he would sell off or eliminate some of the
dozens of businesses acquired by WebMD and Healtheon
over the last few years and that the remaining revenue
would only come from those business units with long-term potential. Mr. Wygod declined to say which units
would be sold off.

"The vision of the combined companies will remain
the same," Mr. Wygod said. "But our execution is going
to be much more focused than before."

Mr. Wygod added that his tenure in the medical
industry would help in this respect. "The fact that I
spent the last 20 years working with the major players
on cost containment brings a lot of comfort to them."

Mr. Berg of First Albany was cautiously optimistic
that Mr. Wygod could make good on his word. "If you're
going to bet on this company, you're betting that this
management team will be able to sprinkle its magic
dust on it and turn it around," he added. "There's no
question it's the best management in the e-health space.
But it's just going to take longer than some people
expected."